The Federal Emergency Management Agency (Fema) overfunded Florida hurricane grants for the 2004 and 2005 hurricanes to such an extent that the US taxpayer could be liable for an estimated $1bn in future disaster costs, according to a new audit from the Homeland Security Inspector General.

The Inspector General said that the report, "FEMA Insurance Reviews of Applicants Receiving Public Assistance Grant Funds for 2004 and 2005 Florida Hurricanes Were Not Adequate", was initiated as a follow-up to previous audits and in response to two OIG hotline complaints.

"The IG sought to determine whether Fema followed proper procedures in making grants to Florida property owners for damages suffered in seven hurricanes and two tropical storms in 2004 and 2005."

Fema distributed about $4.4bn in grants to local governments after seven hurricanes and two tropical storms hit Florida in 2004 and 2005.

Two complaints to the Office of the Inspector General (OIG) in early 2011 alleged that there were duplications of benefits and damages that should have been covered by insurance and, perhaps more significantly, that since 2010 Fema's management had been aware of potentially significant issues with insurance adjustments relating to disaster assistance in 2004 and 2005.

The OIG added that its three previous audits of Florida grant recipients had raised similar concerns.

“Fema officials must assure that aid recipients’ private insurers bear their share of disaster losses before they approve the use of Federal funds,” said Inspector General John Roth.

He added that it was "unconscionable that those officials would also leave the taxpayers liable for future losses by defying policy and ignoring the requirement that recipients obtain insurance coverage for future storms.”

Roth said that the quality of Fema’s insurance reviews in Florida was inadequate. And added that the Florida Recovery Office "knew about these deficiencies in its insurance review process but did not correct them". As a result, Fema may have funded up to $177m that insurance should have covered.

The audit alleged that Fema’s insurance specialists "routinely waived the requirement to obtain and maintain insurance for future disasters, even though they did not have the authority to take such action". And that Fema’s Florida Recovery Office did not detect and correct this deficiency. "As a result, Fema potentially stands to lose up to $1bn in future Florida disasters because many Florida communities may not have adequate insurance coverage for future disasters such as those that occurred in 2004 and 2005.”

The Inspector General claimed that, in some cases, "the specialists determined that insurance was not available, even when the applicant had a policy covering the damaged facilities. Of the 78 project worksheets we reviewed, 38 included a comment that no insurance was available or that insurance did not cover the damages." A review by the OIG found that the Fema insurance specialists "adequately supported only four of their 38 ‘no insurance’ decisions". Of the remaining 34 projects, totaling $11.1m "Fema insurance specialists either incorrectly arrived at that decision, or could not support that decision. Specifically, FEMA insurance specialists incorrectly arrived at a no-insurance determination for 23 projects totaling $8.6m, and had no support to justify their determinations for 11 projects totaling $2.5m.”

Fema said it was withholding comments until after the OIG issued its final report.

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